Markets Undergo A “Trumpectomy”

Shanny Basar

Michael Hewson, chief market analyst at spread betting firm CMC Markets UK, said financial markets are experiencing a “Trumpectomy”, a shock bigger than the UK decision to leave the European Union.

Hewson said in a statement: “If Brexit was a shock to markets, then today is likely to be perceived as Brexit on stilts despite the fact that today’s reaction appears much more orderly, despite sharp falls in the aftermath of the realisation that Hillary Clinton had fallen short of her campaign to win the White House.”

He added that the reaction appears to have been tempered is probably due to conciliatory nature of Trump’s acceptance speech, and the nagging doubt that the pollsters could be wrong. “As you would expect the US dollar has sold off but is off its lows as the prospect dawns that today’s uncertainty may well translate into a delay in next month’s US rate rise,” said Hewson.

In London early risers in the stock market have been the healthcare and mining sectors while financials have come under pressure.

CLS, bank-owned physical settlement system for foreign exchange, CLS, bank-owned physical settlement system for foreign exchange, said in a statement that input volumes were seven times for FX trading activity between 02:00 – 03:00 GMT when the results for key swing states were announced. This  continued following the confirmation of  Trump as president between 08:00 – 09:00 GMT, when input volumes were more than double normal levels for that hour.

“The largest increase in currency pair activity was the US dollar traded against the Mexican peso, 63 times normal levels for that hour,” added CLS.

  • Florence Pisani, global head of economic research at Candriam Investors Group, a European multi-specialist asset manager with assets of €100.1bn, owned by New York Life Investment Management

Pisani tweeted: “For now we stick to our 2% growth scenario for the US economy in 2017.”

  • Richard Dunbar, senior investment strategist at Aberdeen Asset Manager, the UK asset manager

Dunbar tweeted: “Now is the time for cool heads. The US remains the country from which virtually all disruptive technology over the last 50 years has emerged; where the rule of law is sacrosanct; with relatively favourable demographics; and broad and deep pools of capital. None of these things has changed overnight.”

  • Viktor Nossek, director of research at European exchange-traded fund provider WisdomTree

Nossek said in an email that Trump’s plans to handle key issues like immigration, foreign trade and US defense are unknown.

He said: “The message to investors is to be prepared: volatility will continue in the short-term, so hedge your broad exposure in equities and think about retreating back to safe havens – like gold. The highly anticipated rate hike might be put on ice so US Treasuries may become more attractive. Over the longer-term, we should see US equities gaining appeal.”

  • James Butterfill, head of research & investment strategy at European exchange-traded fund provider ETF Securities

Butterfill said in a blog that uncertainty around Trump’s political agenda and the possible increase in protectionist measures could weigh on global trade and ultimately dampen the global economic outlook, favouring bonds over equities.

“Currency vigilantes are likely to act.,” he added. “A sharp fall in the USD will result as uncertainty over trade and foreign policy jumps.”

Butterfill continued that rising foreign exchange volatility is another negative for the Mexican peso and sterling, while the Japanese yen and the Swiss franc will be the big gainers.

“US equities are trading at a 50% premium to their long-term cyclically adjusted valuations, making them more vulnerable to a sell-off,” he said. “Consequently, some equities are likely to hit their limit down (5% fall) and therefore have trading suspended.”

Gold prices will go higher and industrial stocks that maintain civil infrastructure are likely to benefit from higher opportunities for government projects under Trump.

  • Valentijn van Nieuwenhuijzen, chief strategist and head of multi asset at NN Investment Partners, the Dutch asset manager

Van Nieuwenhuijzen said in an email that risky assets likely to suffer in a period of uncertainty and the fall in the Mexican peso and the US dollar are already visible. He added: “Key will now be whether or not Trump will prove to be a populist or a pragmatic president. “

He said that Mexico and China are the most exposed emerging markets, which export most to the US. However the Federal Reserve may be more cautious about raising interest rates which could be positive factor for emerging economies that rely more on foreign capital than on exports to the US.

“Higher infrastructure spending, lower corporate taxes and more deregulation are, as such, not negative for equities” van Nieuwenhuijzen added. “Finally, the possible U-turns in international relations and trade policy that the president-elect hammered on during the campaign will not be that easy to implement.”

  • Keith Wade, chief economist & strategist at Schroders, the UK fund manager

Wade said in a blog that there is likely to be a modest fiscal stimulus but a trade war as the president raises tariffs on China and Mexico.

“The net effect is that after a brief boost from tax cuts, the economy will cool as inflation and interest rates rise,” he added. “With higher tariffs pushing up prices and wages rising as immigrant labour supply falls, the overall outcome is likely to be stagflation, i.e. weaker growth and higher inflation.”

In addition bond yields may rise as investors seek greater compensation for inflation risk, while equity markets are expected to de-rate. Cuts in corporate tax rates will offset some of this and sectors such as energy and financials could benefit from reduced regulation.

“More broadly, the prospect of protectionism and lower global growth will hit equity markets and risk assets worldwide,”said Wade. “Emerging markets are particularly vulnerable given their dependence on global trade.”

  • Douglas McWilliams, president of the Centre for Economics and Business Research, an independent UK economic forecasting and analysis

McWilliams said in a statement: “My rough and ready calculation is that world growth is likely to be around 0.25% to 0.5% per annum slower from 2018 onwards in response to creeping protectionism and reduced migration.”

He added that falls in the US dollar and the US stock market could be reversed quite quickly and US growth is unlikely to stutter in the short-term.

“Probably the decisive result of the election will be associated with a mini spending boom,” said McWilliams. “Janet Yellen will have to be careful about when she raises rates in response to this because it (as in the UK post Brexit boom) may not be long-lived and a premature rate rise as the mini boom blows out might trigger an over reaction.”

  • Ed Perks, chief investment officer of Franklin Templeton Equity

Perks said in a report that there is likely to be continued equity market volatility.

“We believe the health of the US economy, in concert with corporate earnings and dividend growth and consumer employment and spending trends, should be a significant factor for future market returns,” added Perks. “However, it’s important to recognize that Trump’s trade agenda could alter the path to growth for multi-national corporations, casting doubt into many investors’ minds about the sustainability of market resiliency.”

He said sectors potentially facing regulatory changes or systematic government policy changes may be most affected by the new administration such as healthcare, drug companies and financials.

“As unexpected events play out, they may create dislocations, but they also may create opportunities for longer-term investors,” added Perks. “We aim to potentially take advantage of some of those short-term dislocations.”

  • Christopher Molumphy, chief investment officer of Franklin Templeton Fixed Income Group

Molumphy said: “Many of the policy items discussed on the campaign trail cannot be implemented without bi-partisan support. Unfortunately, that means we most likely will see elevated levels of volatility in the markets including a flight to quality.”

He added that the fundamentals of economic growth and the labor market continue to improve at a gradual rate.

“We believe these fundamentals, along with the passage of this election, should give the Fed confidence to continue the tightening process and raise rates in December, albeit at a very measured pace,” said Molumphy.

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